Colombia central bank holds benchmark interest rate steady

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Colombia’s central bank held its benchmark interest rate for a 10th consecutive month on Wednesday, as policymakers grappled with the twin constraints of inflationary pressure and an economy weakened by the drop in global oil prices.

The seven-member board voted unanimously to maintain the lending rate at 4.5 percent, meeting the forecast of all analysts in a Reuters survey this week.

Inflation has exceeded the bank’s target of 2-4% since February, though the board expects it to come back within the range this year.

The board cited slightly easing inflation, slowing domestic demand, an expected slackening in the pace of investment and falling unemployment as key factors influencing its decision.

“The slowdown that began in late 2014 continued in 2015,” the bank said in its statement. “Inflation fell and expectations remain close to 3 percent. Domestic spending in the economy continues its adjustment process due to the lower dynamic of national income.”

Economic growth is likely to slip below 4% this year for the first time since 2009, while inflation has hovered above the upper limit of the central bank’s 2 percent to 4% target range since February, limiting policymakers’ options.

Inflation was running at 4.41% in May while in that month in 2014, it was 2.93 percent.

“Data for the second quarter of 2015 suggests that the Colombian economy continues to adjust to new external conditions and that household spending could show moderate growth,” the bank statement said, highlighting signs of quicker expansion in major developed economies including the US, Europe and Japan.

With inflation the main guiding indicator of monetary policy, recent higher inflation would not be consistent with an interest rate cut, Citibank in Bogota said in a statement after the board’s decision.

“All in all, we expect the bank to keep rates at 4.50% for the remainder of the year,” Citibank said.

Expectations that rate increases in the United States are now more imminent as its economy shows signs of renewed pep, are likely to be a key consideration for monetary policy in Colombia and other emerging markets in the coming months.

Rate increases in the United States would make its bonds a more attractive investment and could draw portfolio investment out of Colombia. That would maintain pressure on the Andean country to keep interest rate spreads competitive to prevent the currency from weakening and inflation from speeding up.